Unlike the rest of the world, diesel is cheaper here, so industries are finding it makes sense to shift to the fuel.
The perils of subsidy take different shapes. It is not only subsidised domestic LPG or kerosene oil being diverted for commercial use. With the price of diesel being stable under government control, industrial users of furnace oil in several states are increasingly turning to diesel instead.
This is one reason why the consumption of diesel is now growing at a sharper rate than petrol after several years. It is not just diesel passenger vehicle sales driving this trend.
Furnace oil is largely an industrial fuel. It is a key ingredient in generation of electricity and heat in a number of production units.
Being market-linked, the price of furnace oil has been moving up. R S Butola, chairman of Indian Oil Corporation, the country’s biggest oil marketer and refiner, said furnace oil is selling at $103-104 per barrel in India, compared to diesel’s price of $97 per barrel. This is due to a price cap on diesel, as a result of which the domestic oil companies are retailing it at a loss of a little over Rs 12 per litre.
The pricing of diesel, kerosene and domestic LPG is regulated by the government. Due to the huge gap between the government-set price of kerosene and the market price, largescale diversion takes place and many intended beneficiaries do not benefit.
The situation is identical in the case of LPG cylinders meant for domestic use.
Globally, the demand for furnace oil is declining, partly aided by concerns for the environment.
Since the calorific value of diesel is higher than furnace oil and it is a cleaner fuel, it makes economic sense for consumers to switch over to diesel from furnace oil whenever the price is favourable.
Domestic furnace oil consumption fell by 6.5 per cent in 2010-11 and the fall so far this year is around nine per cent. The country’s annual furnace oil consumption is 10.87 million tonnes, against diesel’s 60 mt. In the global market, by contrast, the price of furnace oil has remained below that of crude oil and much below that of diesel. “This phenomenon is causing distortion. Instead of burning furnace oil, consumers are burning diesel, which is not an efficient usage of diesel,” Butola said, adding there is an urgent need for policy makers to look at the pricing policy of petroleum products.
The gap between diesel and furnace oil is different across states, due to taxation. The gap is sharpest in Delhi, where furnace oil sells at Rs 55,828 per tonne against Rs 49,501 for diesel.
“If one adjusts the diesel price for its higher calorific value, its price becomes even cheaper, at Rs 46,725 per tonne,” said an industry official. In Uttar Pradesh, furnace oil sells at Rs 53,663 per tonne while the diesel price after adjusting for its higher calorific value is Rs 49,359 per tonne.
“This trend started in August and it continues to widen, as the diesel price has remained unchanged,” the official said.
